U.S. factory, construction data brighten economic outlook

WASHINGTON (Reuters) - U.S. factory activity increased more than expected in December, boosted by a surge in new orders growth, in a further sign of strong economic momentum at the end of 2017.

FILE PHOTO: Construction is seen in downtown Los Angeles, California U.S. November 28, 2017. REUTERS/Lucy Nicholson

The economy’s robust fundamentals were also underscored by other data on Wednesday showing construction spending rising to a record high in November amid broad gains in both private and public outlays. Given the bullish growth outlook, economists expect the Federal Reserve will raise interest rates in March after increasing borrowing costs three times last year.

“Strong manufacturing and construction data confirm the U.S. economy is firing on all cylinders at the turn of the year,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. “The Fed remains solidly on track to lift rates again in March and two more times this year, with possible upside risk if growth doesn’t simmer down.”

The Institute for Supply Management (ISM) said its index of national factory activity jumped to a reading of 59.7 last month, the second-highest reading in six years, from 58.2 in November. A reading above 50 indicates growth in manufacturing, which accounts for about 12 percent of the U.S. economy.

The survey’s new orders sub-index shot up 5.4 points to 69.4, the highest reading since January 2004. Manufacturers also reported an increase in export orders. While a measure of factory employment fell 2.7 points last months it remained at lofty levels consistent with an expansion in manufacturing payrolls.

Factories also reported paying more for raw materials, with the survey’s prices index jumping by 3.5 points. Rising raw material prices bolster the view that inflation will pick up in 2018.

Manufacturing is likely to get a boost this year from a $1.5 trillion tax cut approved by the Republican-controlled U.S. Congress last month. The overhaul of the tax code, the most sweeping in 30 years, slashed the corporate income tax rate to 21 percent from 35 percent.

Business spending surged in anticipation of the corporate tax cuts. Recent weakness in the dollar and a strengthening global economy are expected to buoy exports of U.S.-made goods, which would underpin manufacturing.

“It is more than just domestic developments that are lifting animal spirits,” said John Silvia, chief economist at Wells Fargo Securities in Charlotte, North Carolina. “A number of the published industry comments focused on a pick-up in demand from overseas.”

The dollar .DXY was trading higher against a basket of currencies. U.S. stock indexes hit record highs and prices of U.S. Treasuries rose.

BULLISH OUTLOOK

The ISM survey showed manufacturers upbeat about the economic outlook. Machinery producers reported strong international sales and computer and electronic products manufacturers said they were “seeing a ramp-up with companies releasing early 2018 spend now.”

Food, beverage and tobacco products manufacturers, however, struck a more cautious note saying that while the economy and business were strong, signals of “headwinds in 2018 are persistent.”

In a separate report on Wednesday, the Commerce Department said construction spending rose 0.8 percent to an all-time high of $1.257 trillion in November. It advanced 2.4 percent on a year-on-year basis.

The manufacturing and construction reports added to data ranging from the labor market to housing and consumer spending in sketching a robust picture of the U.S. economy.

Following Wednesday’s data, the Atlanta Fed raised its fourth-quarter gross domestic product estimate by four-tenths of a percentage point to an annualized rate of 3.2 percent. The economy grew at a 3.2 percent pace in the third quarter.

In November, spending on private residential projects soared 1.0 percent to the highest level since February 2007 after rising 0.3 percent in October. The increase was in line with a recent jump in homebuilding and supported expectations that housing would boost economic growth in the fourth quarter after being a drag on GDP since the April-June period.

Spending on nonresidential structures rebounded 0.9 percent in November after falling 0.2 percent in the prior month. Overall, spending on private construction projects climbed 1.0 percent in November to a record high. That followed a 0.3 percent increase in October.

Outlays on public construction projects rose 0.2 percent in November after jumping 3.5 percent in October. Economists, however, expect modest gains in public spending in the months ahead.

“Many state budgets are being squeezed by weaker-than-expected revenues, and face other budgetary pressures related to things like health care,” said Nancy Vanden Houten, a senior economist at Oxford Economics in New York. “Also, the impact of the new tax law on state and local budgets is not yet clear.”